Blog

The future’s… blocky

Last week’s TradeTech Europe in Paris
provided an opportunity for the industry to get together and really start
talking about how to deal with the fallout of MiFID II, which reached its
political agreement in January this year.

It was clear that many attending the event
had already thought deeply about how to meet buy-side trading needs in the
post-MiFID II world, with dark pool regulation chief among their concerns.

Of particular focus was how to ensure the
buy-side can use block trading as a way to continue to trade with minimal
market impact without breaking hard caps on dark trading of 4% for a particular
venue and 8% across Europe as a whole.

A variety of different responses are
currently in the world, with most essentially looking at ways to bring a larger
number of trades under the large-in-scale pre-trade transparency waiver. The
waiver is to be left untouched in MiFID II (though some in the industry are
hopeful its threshold will be reduced – but don’t hold your breath on that) and
brokers and exchanges alike are all looking at ways to increase their ability
to match large blocks or merge high touch and electronic trading to facilitate
negotiated trades.

Brian Schwieger, head of equities at the
London Stock Exchange, said collaboration between buy- and sell-side would be
key to ensuring investors are able to manage the way their orders are exposed
to the market.

In recent weeks and at TradeTech, I’ve been
talking to a lot of brokers and venues, and almost all of them are now looking
closely at how they can help buy-siders make larger trades in order to qualify
for the large-in-scale waiver, which is currently seen as underused. Most
interestingly, they are engaging institutional investors to get their feedback
to ensure they can design tools that really serve their needs.

At present, there is some uncertainty
around how regulators will react to efforts that, on the surface at least, seem
to be designed to circumvent their new rules. However, dark pools were always
intended to help investors trade in blocks without seeing prices move away from
them and being exposed to toxic flow. Following the original MiFID, many dark
trades were actually relatively small, not much larger than average trades
sizes on lit books. Regulators criticised this “unnecessary” use of dark pools
for day-to-day orders and it seems that the industry is now innovating its way
towards a solution that fits what had been the aim of the first MiFID.

To interfere with this innovation, which should
ensure the end investor is not harmed due to buy-side orders being gamed on the
lit exchanges, while pushing many smaller trades back into the lit space, could prove dangerous and further damage an industry that has already been shaken by financial crisis and the regulatory reaction to it. The
future looks blocky, and regulators should embrace it.